Prime Ministers George Papandreou and, from November 11, Lucas Papademos.

Throughout 2011 Greece struggled to cope with its deep financial and economic crisis and to implement reforms aimed at averting default. In the face of increasing public dissatisfaction with the course and cost of reforms, a deepening political crisis culminated in November in the resignation of the government headed by Panhellenic Socialist Movement (PASOK) leader George Papandreou and the appointment of a broader-based transitional government led by technocrat Lucas Papademos.

As part of the aid agreements negotiated with the EU and the IMF the previous year, the government’s fiscal and economic policies were under constant scrutiny by the so-called troika that consisted of the European Commission, the European Central Bank (ECB), and the IMF. While the troika’s progress reports generally acknowledged the government’s efforts to tackle the crisis, they nevertheless called for additional reforms and measures, including further spending cuts and the privatization of state assets. The relatively slow pace of reforms repeatedly threatened the disbursement of aid to Greece. In June euro-zone ministers stipulated that Greece had to implement new austerity measures in order to receive the next tranche of its loan.

In mid-June Papandreou hinted at his willingness to step down if the centre-right New Democracy (ND) party would agree to enter a government of national unity. After ND leader Antonis Samaras turned down the offer, Papandreou reshuffled his government on June 17. Most notably, Evangelos Venizelos moved from defense to the crucial Finance Ministry and became deputy prime minister.

On June 29 Parliament passed the so-called midterm fiscal plan, a new austerity package that called for €28 billion (about $41 billion) to be raised over the following five years through tax hikes, public-sector layoffs, and cuts to health care, social benefits, defense, and public investments, along with another €50 billion (about $72 billion) through privatization of public assets. In September the government announced a reformed tax system, as well as a new property tax, to be collected via electricity bills to fight tax evasion. These and other reforms met with significant resistance from opposition parties, trade unions, and citizens. Throughout the year Greece experienced a series of strikes as well as civil disobedience, which at times erupted in violence.

On July 21 euro-zone leaders agreed on a new aid deal for Greece that totaled €109 billion (about $158 billion) and, for the first time, involved private lenders. On October 27 those leaders raised the amount of the bailout to some €130 billion (about $183 billion). Under this deal, private banks agreed to write off 50% of the money Greece owed them, which amounted to about €100 billion (about $141 billion).

Papandreou’s announcement on October 31 that he would call a referendum on the latest agreement triggered negative reactions both domestically and from Greece’s partners, who brought into question the country’s continued membership in the EU and the euro zone. As resistance increased, even within his own party, Papandreou reneged on the referendum and proposed the formation of a coalition government, though he insisted that a vote of confidence be held first. On November 5 Parliament voted in favour of the government. Papandreou then called for talks on a new government under the auspices of Pres. Karolos Papoulias. After days of negotiations and Papandreou’s formal resignation on November 9, the two main parties and the rightist Popular Orthodox Rally (LAOS) agreed on a new government. Its main tasks would be to see the October 27 bailout agreement, as well as the measures required for its implementation, through Parliament and to lead the country toward elections in early 2012. The new government, headed by Papademos—formerly the governor of the Bank of Greece and an ECB vice president—took office on November 11. Venizelos and many other key PASOK ministers retained their posts. ND took over the Ministries of Foreign Affairs and of National Defense but declined to name any sitting MPs as government ministers. LAOS took over the Ministry of Infrastructure, Transport and Networks. The interim government easily won a vote of confidence on November 16.

The Greek economy was estimated to have shrunk by about 5.5% in 2011, while the budget deficit was estimated at about 9%. Unemployment stood at 18.4% in August, a 50% increase over the previous year. A significant drop in domestic consumption caused by the crisis forced many small businesses to close. During the first half of 2011, the major rating agencies repeatedly downgraded Greece’s credit rating, and it became the world’s least-creditworthy country.

Greece’s foreign relations remained stable, despite some friction with Turkey over the latter’s opposition to Cyprus’s plans to drill for oil and gas off its southern coast. As in the past, no agreement was found with Macedonia over that country’s name. A 1995 agreement had allowed Macedonia to join international organizations (under the name The Former Yugoslav Republic of Macedonia) while discussions on its name continued. On Dec. 5, 2011, however, the International Court of Justice ruled that Greece had violated that accord when it vetoed a 2008 invitation for Macedonia to join NATO.

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